Crypto Startups Partaking in “Creative Destruction” Earn Praise of Investors
“Creative Destruction” Of Crypto During Startups Is Earning The Attention And Praise Of Investors
In any other industry, throwing away any type of revenue is practically sacrilegious. Wall Street is not about to throw cash out the window, and the thriving metropolis of China is not about to start raining yen. Every culture around the world would easily see this strange decision as a way of obliterating their money supply. However, in the world of cryptocurrency, it actually is a major benefit that can improve value for investors.
Though it was not originally planned as such, the destruction of tokens can actually help an initial coin offering (ICO). Startups and other projects thrive on the funding that their projects get from their limited coins, which means that they have control over the cost of their services. However, this gives them the ability to change the way that they utilize their money supply.
Basically, by “burning tokens,” which just means that they are eliminating the key that allow the tokens to be accessed, they actually end up making the tokens worth more. They become scarce, which makes them valuable and coveted. Many platforms are creating their ICOs with a whitepaper that specifically says that they will be destroying new tokens as investors earn profits. The companies are promising consumers that their new purchase will bring in more value with the burning of tokens, as soon as they are earned back.
Eidoo’s ICO And Token Burning
The concept is a little out of the ordinary, but investors are completely behind it. Eidoo, which is a platform in Switzerland, recently decided to burn 1% of the total supply, which was noted in their November ICO. To announce it, the platform issued a blog post that said, “The excellent news is that we will destroy 920,000.00 EDO tokens starting from August 31st. This means that we are going to permanently remove one percent of the total supply of EDO tokens.”
As a result, the price of the tokens went up by a full 40% when the post was pushed. Since Eidoo is one of the biggest holders of EDO tokens, this surge in price is a good thing for both the company and the investors that managed to get in at the ICO.
Eidoo has been around since 2016, and their burns for coins began much earlier than this current trend. The ICO alone earned $27.9 million, and the project has more plans to burn this month. One representative of the Vanbex Group, Lisa Cheng, said, “Projects burn their own tokens to remove them from the market to demonstrate consumption – as a result this creates further scarcity, thereby affecting the market cap, and arguably is a form of price manipulation.”
Amelia Tomasicchio of CoinDesk said, “Burning 50 percent of our revenue is not really creating any loss for the company itself, but it is creating value for the entire EDO token holders.”
While there are no guarantees that this decision will keep up their revenue in the long run, there are experts that believe that these experiments are part of the deal with financial risks.
A New Path
William Mougayar, who is a startup advisor, author, and investor, says, “This is a 1.0 attempt to manage how an economy would work. They all want to play Fed Reserve Chairman or Chairwoman.” Mougayar believes that other companies will manage the cryptocurrency creatively, though there are always chances that the new plans will not work out. The decision to destroy tokens could signal to customers that there is a problem with the company, or it could raise the price too high to continue selling.
Tomasicchio’s opinion on the actions of Eidoo stand. She said, “This model has been adopted during the recent months by a variety of projects in the space, however, Eidoo has been quite unique in burning so many tokens in such a short time span – thanks to a very high revenue coming from the service usage of the recent months.”
Other Exchanges Follow
Eidoo may have been one of the first, but their results are hardly the most prominent. Binance made the decision in July to burn over two million BNB tokens, which amounted to about $30 million. However, this is part of their commitment that they setup from the beginning, when they said they would burn 20% of the profits in tokens annually. However, to push the platform further, saying that they will not stop until they have burned a total of 50% of the original token supply.
Despite the ability to boost revenue and the price of tokens, burning tokens also has another use. Binance specifically helps to reduce transaction costs, which makes their platform more welcoming to new and seasoned users. However, it all depends on if investors like what they see when they get there. Mougayar compared this transition to a tavern, saying, “If I bribe you with a free beer, you may come once.” But that does not mean users will return.
Everyone loves a good discount, but a platform cannot solely rely on their discounts to keep users interested. They need to be strong in the rest of their functions and opportunities, or they lose users as fast as they got them. KuCoin is a good example of that, since they are limiting their burn to 10% of their annual profits.
Buying back tokens and burning them seems to have a lot of benefits, but they come with a different set of problems than what platforms typically face. Tomasicchio explains how important the classification of a token can be, and how burning tokens can alter that, saying, “The way a given token works defines its very nature. Regulators themselves are already doing a good job trying to define the different categories of tokens which are being used today.”
Unfortunately, the United States regulators have not quite gotten to this part of the legislation that governs token classification and functions, remaining silent about what this means for burnable tokens. Cheng notes, “I would caution those exploring this concept to check with their jurisdiction as the recent SEC announcements have been quite clear that burning tokens would constitute the actions of a security.”
Cheng referenced the Munchee decision that the SEC established last year. The SEC said that the commitment to users to destroy tokens to support a higher price “derived from the significant entrepreneurial and managerial efforts of others.”
Buybacks help with the stock of a non-crypto companies, as has been proven time and time again. With cash reserves and continual grow, the burning of tokens can help to keep their current investors loyal to the platform, while keeping their price on the market fairly stable to avoid a loss. Cryptocurrency platforms have used this method as well, but the SEC needs to work on finding better ways to classify tokens for better understanding of how the economy is impacted.
Mougayar is not optimistic, going as far as to say, “I’m not sure this will stand the test of time.” However, he also ended on one final thought – “The sky is not the limit.”